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Journal cover: Managerial Finance

Managerial Finance

ISSN: 0307-4358

Online from: 1975

Subject Area: Accounting and Finance

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Using Canonical Correlation to Identify Arbitrage Pricing Theory Factors


Document Information:
Title:Using Canonical Correlation to Identify Arbitrage Pricing Theory Factors
Author(s):Carl B. McGowan, Jr., (University of Michigan - Hint), William Dobson, (Bentley College)
Citation:Carl B. McGowan, Jr., William Dobson, (1993) "Using Canonical Correlation to Identify Arbitrage Pricing Theory Factors", Managerial Finance, Vol. 19 Iss: 3/4, pp.86 - 92
Article type:General review
DOI:10.1108/eb013719 (Permanent URL)
Publisher:MCB UP Ltd
Abstract:This paper presents a new research design to test the efficacy of the Arbitrage Pricing Theory of Ross [1976], similar to that applied by Christofi, Christofi and Philippatos [1993]. In particular, we use a combination of factor analysis and canonical correlation to test the underlying relationships between APT factors developed using factor analysis and unanticipated changes in five macro-economic variables that have been shown to be related to stock returns. The results of this paper indicate that the first factor of industry returns is strongly related to the S&P 500 while the remaining four factors are highly correlated with the term structure of interest rates, the rate of inflation, the default premium, and the industrial production, respectively.


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